In my previous article I
showed that currency in the economy is exactly analogous to poker chips in the
hands of players at a casino. This article discusses the advantages and
disadvantages of cash (currency and coin). This feature of monetary systems is
ubiquitous. There are no monetary systems that do not have a currency
component.

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Who needs cash?

Everyone needs some
readily spendable money for small purchases of daily needs. Cash is never
refused in such transactions, and it is the most convenient way to buy our
small casual needs. But there are other uses for cash, and most of them involve
transactions that are intended to be confidential and anonymous. The more
costly the transaction involving cash, the more likely it is that secrecy is
desired. This is the trouble with cash.

When a paper trail (beyond
a receipt) is required, cash is not used. This means that it is not feasible to
design a monetary system without banks and checking accounts. Further, since
cash is readily spendable in anonymous transactions it is highly prized by
thieves and risky to hold in large quantities. In any imaginable society,
therefore, there are going to be banks and checking accounts.

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That said, let's look at
vulnerabilities of our monetary system caused by the need for cash.

Counterfeit

First, let's briefly
consider counterfeit currency. If it is possible to make passable counterfeit
bills there will be counterfeiters. The effect of an influx of counterfeit
into circulation is to create inflation. The more counterfeit there is in
circulation, the less the dollar is worth.
There has been, in recent years, a growing effort to redesign the higher
denomination Federal Reserve Notes to make counterfeiting much more difficult. In
2006 the Federal Reserve estimated that 1 in 10,000 Notes was counterfeit.

Distribution of Federal
Reserve Notes

Until fairly recently the
only way US currency could get into circulation in foreign lands was for
traveling US citizens to make purchases there from a willing vendor using US
currency. The deregulation of the US banking system and globalization have
ended that situation and have brought changes to the monetary system that have
a huge impact on the stability of the US economy without any public discussion
whatever.

The reason these changes have come about has nothing to do with
providing the American people a better, more useful medium of exchange or store
of value. In fact, the changes have made our banking system dependent on
foreign actors that we do not control at the expense of our national economic
stability.

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The rest of the developed world is now awash in $100 Federal Reserve
Notes. The Federal Reserve has published a defense of this fact that makes the
claim that this huge amount of US cash held by foreigners in other countries is
a financial benefit to the US. The logic of that as explained in "The Location
of U.S. Currency- How Much Is Abroad?"
FRB Bulletin Oct 1996, invokes the idea that the US is benefitting from
it in the same way as if it were an interest-free loan to the US Treasury--an
idea that seems wrong to me. But if true it is a loan of an amount determined
by foreign actions, not deliberate actions of the Fed. Such "loans" also can be
terminated by foreign holders of the cash without the consent of the Fed, and with
potential damage to the US economy. Congress has never authorized this kind of
borrowing, and it has many downsides as discussed here.

A brief publication of the San Francisco
Federal Reserve Bank, April 2004, titled "How
much currency is circulating in the economy, and how much of it is counterfeit?
Is currency included in the money supply statistics?" provides some insight. In
March, 2004, the Federal Reserve estimated that US currency in circulation
worldwide was about $667 billion. About 60% of it, or $370 billion, was
estimated to be held overseas. By 2013 the total amount of currency in
circulation had grown to $1.2 trillion dollars, and 70.7% was estimated to be
held abroad. To put that in perspective, that is $2,660 dollars for every man, woman, and child in the United States. Quoting from "How Currency Gets into Circulation", July 2013, Federal
Reserve Bank of NY,

"As of July 2013, currency in circulation--that is, U.S.
coins and paper currency in the hands of the public--totaled about $1.2 trillion
dollars. The amount of cash in circulation has risen rapidly in recent decades
and much of the increase has been caused by demand from abroad. The Federal
Reserve estimates that the majority of the cash in circulation today is outside
the United States."

Note that these numbers are only estimates.
The Federal Reserve admits that it is not possible to account for all this cash
exactly, because cash is easily concealed and cannot be tracked as it moves
from one possessor to another.

I am a retired physicist and hold a B.S. in Ch. E. as well. I have been an environmental activist since the early 1970s. I was a founding member of the Save Barton Creek Association in Austin, TX. In 2006 I was a member of a select committee (more...)